Leong Hup prospects still in positive territory
Sound rating underpinned by integration, diversification
PETALING JAYA: MIDF Research has maintained its recommendation on Leong Hup International Bhd (LHIB), pending the outcome of the investigation by Malaysia Competition Commission (MYCC) into allegations Leong Hup’s subsidiary, Leong Hup Feedmill Malaysia Sdn Bhd (LFM) and four other feed millers, have engaged in price fixing in violation of the Competition Act 2010.
The MYCC, last Friday, stated LFM and other feed mills had provisionally been determined to have violated Section 4 of the Competition Act 2010 (Act 712).
LFM is entirely owned by LHIB, which is in the production and sale of animal feed, as well as the provision of transportation services.
“The notice claimed that LFM allegedly participated in anti-competitive agreements and coordinated actions in raising the price of poultry feed, between early 2020 and mid2022.
“Based on Section 4 (1) of the Act, it is prohibited for businesses to enter into a horizontal or vertical agreement, if it significantly lessens, prevents or distorts competition in any market for goods or services,” MIDF Research stated in a report on LHIB yesterday.
The anticipated financial penalty and proposed directions were not yet final, but LHIB will address the matter with an external legal counsel, submit written representations within the allotted 30-day time frame and make an oral argument before MYCC.
After hearing and considering the representations, along with the evidence acquired throughout the investigation, MYCC will then make its final decision about whether the Act was violated, said MIDF Research.
LHIB contended the cost hikes by feed millers was mainly due to Malaysian feed mills importing the same raw materials from overseas.
The oligopoly structure of the feedmill business in the country leads businesses to manufacture homogeneous products at a fixed marginal cost. The millers compete by establishing pricing such that when one increases, the others follow suit.
Hence, LHIB stated that just because all producers increase around the same time does not equate to price fixing.
MIDF Research stated based on Section 40 (1) of the Competition Act, if MYCC determines Section 4 was violated after the hearing, it might impose a financial penalty of not
exceeding 10% of LHIB’S feed mill revenue for the relevant period.
“We expect a worst-case financial penalty of between Rm74.4 mil to Rm744.4 mil, premised on a financial penalty of between 1% to 10% of LHIB’S feed mill revenues from early 2020 to mid-2022.
“LHIB only operates a feed mill in Malaysia. The financial penalty could potentially drag LHIB revenue for the financial year 2022 (FY22) by 0.9% to 9% and net earnings by 63% to 633%,” said MIDF Research.
The research house maintained its target price at 47 sen on LHIB, the valuation based on the earning per share of 3.2 sen at a price-earning ratio of 14.6 times for financial year 2022.
“We are aware margin compression will continue in the near term on the back of the feedmill’s continued high raw material prices, along with the price controls for chicken and eggs in Malaysia.
“In spite of that, we are positive about LHIB’S long-term prospects, underpinned by its vertical integration of poultry, eggs and livestock feed and geographical diversification across Malaysia, Singapore, Indonesia, Vietnam, and the Philippines,” MIDF Research said.